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Tuesday, March 26, 2013

Financial Condition of Depository Banks

Darryl E. Getter
Specialist in Financial Economics

A bank is an institution that obtains either a federal or state charter that allows it to accept federally insured deposits and pay interest to depositors. In addition, the charter allows banks to make residential and commercial mortgage loans; provide check cashing and clearing services; underwrite securities that include U.S. Treasuries, municipal bonds, commercial paper, and Fannie Mae and Freddie Mac issuances; and other activities as defined by statute.

Congressional interest in the financial conditions of depository banks or the commercial banking industry has increased in the wake of the financial crisis that unfolded in 2007-2009, which resulted in a large increase in the number of distressed institutions. A financially strained banking system would have difficulty making credit available to facilitate macroeconomic recovery.

The financial condition of the banking industry can be examined in terms of profitability, lending activity, and capitalization levels (to buffer against the financial risks). This report focuses primarily on profitability and lending activity levels. Capitalization issues are discussed in CRS Report R42744, U.S. Implementation of the Basel Capital Regulatory Framework, by Darryl E. Getter.

The metrics related to asset performance and earnings show an increase in profitability for the banking industry although many small bank institutions are still experiencing distress. Noncurrent loans still exceed the capacity of the banking industry to absorb potential losses if they were all to become uncollectible. Consequently, lending activities are likely to be restrained until bank loan-loss capacity as well as overall economic conditions improve. Furthermore, profitability in banking is not likely to indicate that pre-crisis lending patterns have resumed. Given the required increases in capitalization buffers to absorb loan defaults as well as the (expected) costs associated with funding loans, profitability trends may differ for banks by size, particularly after accounting for differences in the revenue generating activities of small and large banks.

Date of Report: March 18, 2013
Number of Pages: 18
Order Number: R43002
Price: $29.95

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